America’s Cheap Labor Addiction Revisited

[Editor’s note: Historically, I haven’t run many articles more than once, not because there aren’t quite a few worth re-running, but rather because I write so many in a given month that there simply isn’t time or space above the digital fold. On rare occasions, though, I’ve reprinted my own work when circumstances warrant. Following November’s US jobs report, which featured a much hotter-than-anticipated read on average hourly earnings, a few readers mentioned demographics and immigration. One acquaintance on the sell-side wrote in to ask for a link to an article published in June which touched on those topics in the context of the dynamics discussed here on Friday. Upon re-reading the article, I decided it’d be worth republishing it. I think readers will agree it’s even more relevant now than it was six months ago. If you’re new to the site, I encourage you to consider the extent to which the points made have become more pressing since it was first published. Just this week, Jerome Powell again mentioned a “plunge” in net immigration in the context of America’s labor shortage, wage growth and the mismatch between job openings and available workers.]

Alarmist “wage-price spiral” rhetoric is a fixture of the economic news cycle in 2022.

Scarcely a day goes by without someone warning that the US has already crossed the event horizon — that higher wages are contributing to higher prices, prompting workers to demand even more money, thereby driving up costs for sellers, who then pass along those costs to consumers, in a never-ending, inflationary corkscrew.

While it’s obvious why everyone can’t be rich (if everyone’s rich, then nobody is), what’s less obvious is why the US economy, the purported envy of the world, is seemingly unable to function at higher wage levels for everyday people. Clearly, there’s a limit on what businesses (particularly small businesses) can pay workers at the low-end of the pay scale and there has to be a hierarchy, otherwise there’s no incentive to climb the proverbial ladder. But America is a long (long) way from any kind of intra-company equality.

In 2021, a year during which the media was awash in tales of low-wage workers finally securing leverage in an environment of scarce labor, the average gap between CEO and median worker pay at a sample of 300 publicly-held, low-wage firms was 670 to 1, according to a report from the Institute for Policy Studies, a progressive think tank. That was up from 604 to 1 in 2020. The figure (below) shows the evolution of CEO annual compensation to worker compensation over the last half century, according to separate figures from the Economic Policy Institute.

“The conventional wisdom holds that low-wage workers have benefited economically during the pandemic, but at over a third of corporate America’s 300 low-wage firms, median worker pay did not keep pace with inflation,” the IPS said, in the linked report above, noting that at 69 of those firms, typical worker pay actually fell last year in nominal terms.

At the 300 companies analyzed in the IPS report, CEO pay jumped more than 30% in 2021 to $10.6 million, compared to a 17% increase for the median worker, who made less than $24,000.

The report was a damning indictment, but my goal here isn’t to lament the inexorable excesses associated with the rise of the American super-manager. Instead, I wanted to emphasize that for all the hand-wringing over “spiraling” wage costs, there seems to be plenty of money for the C-suite and, one imagines, for the tier of managers just beneath them in the corporate structure.

When it comes to paying everybody else, though, 5% wage growth (figure below, updated with the latest ECI figures) counts as a crisis — an existential threat with the potential to tip the economy into a deadly “spiral.”

There are, of course, innumerable models which illustrate the relationship between wage growth and inflation, but it nevertheless seems odd that a 5% raise after decades of essentially stagnant pay is enough to undermine the foundation of the world’s largest economy. Also, don’t forget that real wages are now deeply negative, a state of affairs that isn’t exactly conducive to voracious consumption, even if the implied precarity does argue for even more desperate demands for higher pay.

One way to think about all of this is to suggest that when you start paying people fair wages in America, the economy simply can’t take it. The system is addicted to cheap labor. It resists any attempts (natural or legislative) to correct glaring disparities. In the absence of chronically underpaid workers, it creaks and buckles.

If that’s even a semblance of accurate, then the figure (below) doesn’t bode especially well. The working age foreign-born population stopped growing in 2019 prior to the pandemic.

As Giovanni Peri and Reem Zaiour, from the University of California, Davis, wrote earlier this year, the initial move below trend was due to “a combination of stricter immigration enforcement and a drop in the inflow of Mexican immigrants.” When the pandemic put a stop to international travel, the working-age immigrant population fell even further.

As you might imagine, there’s a link between unfilled job openings in key sectors and the drop in foreign workers. “In spite of upward pressure on wages in several sectors… the number of unfilled job openings relative to employment has remained very high,” Peri and Zaiour went on to say, adding that “the absence of foreign-born workers plays an important role [as] the sectors that had a higher percentage of foreign workers in 2019 had significantly higher rates of unfilled jobs in 2021.”

At the same time, Americans have been indoctrinated over the past decade to believe a college education isn’t worth pursuing. It doesn’t help that perverse incentives drove up the price, leaving prospective students to ponder a mountainous debt burden upon graduation. Efforts to make college free are everywhere and always resisted, ostensibly on the grounds that the cost is too high, but it’s worth noting that one party in the country’s political duopoly is keen on perpetuating the notion that universities (and knowledge in general) are somehow antithetical to traditional American “values.” But the services economy needs skilled labor in addition to unskilled workers. If Americans stop going to college, the economy will depend more and more on imported labor for highly skilled jobs.

So, if the US closes her doors (and shores) to immigrants, the country will be short of scientists, doctors, engineers, computer programmers, hotel staff, field workers, line cooks, landscapers and any number of other positions, both skilled and unskilled. Competition for what few workers there are to fill those positions will thus remain a semblance of intense even after the labor market normalizes, possibly keeping upward pressure on wages.

In other words, if there’s a chronic labor deficit even after pandemic effects subside, we’ll have to pay Americans higher wages to fill the empty positions unless we correct for the immigration shortfall. Needless to say, Republicans will never agree to easing immigration restrictions, so this could remain an issue, especially if the GOP reclaims the White House in 2024.

Something has to give, though. If we deliberately choke off immigration and disincentivize higher education, there won’t be enough workers to fill all the available jobs in the services sector. Any structural labor shortage will keep pressure on wages. That’s an untenable outcome for an economy addicted to cheap labor and seemingly disposed to convulsing at the mere suggestion of higher pay, as though an impoverished populace was part of the plan all along, rather than an unfortunate outcome of meritocracy and competition.